Investor's Champion Blog
Provides refreshingly forthright, independent comment on predominantly small cap companies and specialist investment funds. Informed opinion, based on first-hand research, but pulls no punches in exposing management weaknesses.

RWS gets a material tax boost and the shares…… fall

RWS the AIM quoted provider of intellectual property support services came out with highly pleasing news that HMRC has agreed the Group's 2004 tax return. The outcome of this is the release of a £4.4 million tax provision and an increase in both pre and post tax profits of £4.4 million in the six months ending 31 March 2009.

With five years of uncertainty being resolved and shareholder funds materially enhanced one might have expected to see a positive reaction from the share price – wishful thinking, the shares actually dropped approximately 2%!

Never mind, the, shares have had a good run of late and clearly the £4.4m boost to 2009 profits is of little relevance, despite the fact this is equivalent to approx 30% of estimated 2009 pre-tax profit. (Consensus 2009 estimates £14.3m).

I acknowledge that this represents a non-cash gain but it is still a 12% boost to net assets and removes a potential restriction on the group's cash balances.

Indian Film Co - have the lunatics taken over the asylum?

While one can sympathise with the falling share price in the current market, corporate governance issues now appear to be of greater concern at Indian Film Company.

A limited number of shareholders appear to have been given access to additional information. Given the financial scandals of the past few months wouldn’t it be nice for all shareholders to be privy to the same information!

Former dissident shareholders who were previously highly critical of senior board member Raghav Bahl, have suddenly altered their opinion and now acknowledge that ‘Raghav Bahl's contribution and the brand awareness of the Network 18 Group of companies that he controls, have made and continue to make important contributions to the Company and its business.' They had previously asked for his removal!

Former dissident shareholders have conveniently gained appointment to the board. One of them (Deepak Kumar Gupta) appears to hold a direct and beneficial interest in only 1.07% of the company’s shares yet is now overseeing the strategic review!

Both are from corporate finance/investment management backgrounds with no evident experience of the Indian film industry. We all know how well the financial engineers have performed over the past few months - is it now a case of the lunatics having taken over the asylum!

I find this extract from the recent RNS amusing:

‘Atul Setia, aged 42, is a partner at Altima Partners LLP ("Altima"), an investment manager. Over the last three years at Altima, Mr Setia has been focused on building relationships and specialised in India. ‘Building relationships’ – now that’s an achievement!

The statement of 30th January 2009 concludes that ‘The Board and IFCRG believe that the appointment of the two new non-executive directors together with the forthcoming strategic review shall help ensure the Company's successful prospects for the future.’

At the operating level the company appears to have been performing satisfactorily the share price has simply been caught up in the general stock market misery.

Net asset value at 30th September 2008 was £54.68 million or 99.42p per Ordinary Share. However, in this instance it’s probably unwise to rely too heavily on the support of net asset value. Net asset value of £54.8m is predominantly made up of £15.8m of ‘Exploitation rights’ and £25.4m of ‘Investments in films under production’. With regard to these the notes to the financial statements reveal the following:

The Company amortises film costs using the individual-film-forecast method. Under the individual-film-forecast method, such costs are amortised for each film in the ratio that current period revenue for such films bears to of remaining unrecognised management’s estimate ultimate revenue as at the beginning of the current fiscal year. Management regularly reviews and revises, where necessary, its total estimates on a film-by-film basis, which may result in a change in the rate of amortisation and/or a write down of the intangible asset to fair value. The amortisation charge is included under cost of sales in the Consolidated Income Statement.

The assets are assessed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If any such indication of impairment exists, the Group makes an estimate of its recoverable amount.

i.e. net asset value is essentially determined by management estimates!
Net asset value calculations aside, it’s surely the time for full and frank communication to all shareholders!

Velsoi:lots of positive news but little response from the share price – I think I know why

Hot on the heels of last week’s positive trading statement AIM listed Velosi has come out with another positive announcement. Despite all the encouraging noise unfortunately the share price remains rooted to its lows.

The group’s associate company, Velosi Oman which is 50% owned by Velosi, has been re-awarded a quality assurance, quality control and third party inspection services contract with Petroleum Development Oman ("PDO"). The new contract is worth an estimated US$30m and commences in June 2009, covering a period of four years. Velosi will provide quality assurance and quality control services throughout Oman, and third party inspection services on a global basis.

PDO is the major oil and gas exploration and production company in Oman, accounting for more than 80% of the country’s crude oil production and nearly all of its natural gas supply. PDO is owned by the Government of Oman (which has a 60% interest), the Shell Group (34%), Total (4%) and Partex (2%).

With all this positive news it’s surprising the share price hasn’t nudged up.

It’s easy to lay the blame at investor’s current dislike of micro caps (Velosi’s market cap is only £17m) combined with the group’s exposure to oil and gas markets which are proving less than appealing to many at the moment!

You can’t even blame a lack on broker support with both the house broker and another independent issuing coverage over the last few days.

In the case of Velosi its lack of investor appeal may also be down to the rather confusing nature of its activities, or at least the description of those activities. The group’s regulatory announcements are generally preceded by a brief description of its activities as the provision of ‘asset integrity and HSE services to a number of major national and multinational oil and gas companies’

I personally consider it difficult to ascertain exactly what is meant by ‘asset integrity management’ and I’m sure I am not alone in this respect. With a key investment mantra being to invest in what you understand it’s hardly helpful to Velosi’s investment appeal, especially during these demanding times.

Tanfield - news of Ford JV and shares mysteriously surge!

News of the Ford JV, where there is little expectancy of short term profit, mysteriously resulted in a surging share price for Tanfield - but at least there are fewer liquidity problems with this AIM stock!

The recent trading update confirmed what most of us already knew, that trading conditions in the second half for Tanfield were difficult.

The year-end cash figure is £11.1m, down on the previous figure of c£13.3m on 31st October 2008. With £8m being collected in the weeks following the year end, cash balances at the end of January 2009 were £13.1m. There was also encouragement from the announcement of a JV with Ford, but more of that below!

Trading conditions in all markets remain challenging, with little visibility and reduced order intake. Given the restricted horizon of the order book, visibility for 2009, in line with peers, is limited according to management.

The better news is of the Smiths Electric Vehicles JV in the US with Ford, in which it will have a 49% stake – thankfully it won’t have to shell out any cash! Tanfield will work with Ford to introduce a battery-electric light van based on the European-designed Ford Transit Connect which goes on sale in North America this year.

It appears that Tanfield will be sole supplier to Ford for the Transit Connect rather than the motor group’s electric offering as a whole (it’s worth visiting the following link ).

The press release includes the statement:
‘As for Ford’s electrification strategy, this is merely the first step: by 2011, Ford will bring a battery-electric small car to North America, followed by next-generation hybrid and plug-in hybrid vehicles in 2012.’
Tanfield’s Smith Electric Vehicle division has been subcontracted to take care of the electric vehicle conversion production line i.e. it’s providing short run assembly for the initial test vehicles. I assume key components, such as the 50 Kw electric motor, will be brought in. The 40 Kw/hr iron-phosphate lithium-ion battery pack is apparently being supplied by Valence Technology.

The shares rocketed on the news which was somewhat mystifying given the long term nature of the Ford deal and the small number of vehicles involved - Tanfield will manufacture a limited number of electric Ford Transit Connect vehicles in North America during 2010.

Tanfield needs all the encouragement it can get in the current market and management confirmed that they remain debt-free, without banking covenants or interest costs and do not anticipate this changing in the short to mid-term.

Furthermore, at least Tanfield doesn’t have to suffer with the same poor liquidity as the majority of AIM companies. For a company of its small size (£36m market cap) the trading volumes are truly wondrous – for AIM at least - which naturally creates a different problem!

We have been hard on this one in the past, but that was simply down to the ridiculous rating assigned to the company by a few too many wacky shareholders/traders/speculators etc.

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